Moody's: high-yield bond covenant quality holds near record low

By Cristal Cody

Tupelo, Miss., Dec. 11 - The covenant quality on North American high-yield bonds improved slightly in November, but remained near the record low set in October, Moody's Investors Service said in a report on Wednesday.

"Despite the improvement for the month of November alone, on a three-month rolling average basis, bond covenant quality hit a record low for the third consecutive time last month as comparatively stronger August rolled off," Moody's said in a press release.

In the report, "Bond Covenant Quality Remains Near Record Low," Moody's measures bond covenant quality on a five-point scale, with 1.0 providing the strongest investor protections and 5.0 denoting the weakest protection.

The average covenant quality score was 4.18 in November, compared with 4.26 in October, Moody's said. On a three-month rolling average basis, the score was 4.23 in November, compared with 4.19 the previous month, according to Moody's.

Stronger covenants for Caa/Ca bonds helped drive November's slight improvement, Moody's said.

"While bonds rated Ba at issuance strengthened slightly to 4.51 in November from 4.58 the prior month, those rated Caa and Ca rebounded significantly, to 3.70 from 3.90 in October," Evan Friedman, senior covenant officer and co-author of the report, said in the release.

The most protective covenant packages came from Tervita Corp., which Moody's rated 3.11, followed by Wise Metals Group LLC and Alcatel-Lucent USA Inc., both with a 3.12 covenant quality score.

Tervita, a Calgary, Alta.-based environmental management services provider, sold $335 million of 10 7/8% senior notes (Caa2/CCC/) on Nov. 20 at 99.684 to yield 11 7/8%.

Wise Metals brought a $650 million offering on Nov. 26 of 8¾% senior secured notes due 2018 (Caa1/B-/) at par to yield 8 ¾%. The company is a Muscle Shoals, Ala.-based producer of aluminum beverage sheet.

Alcatel-Lucent, a telecommunications equipment company based in Paris, priced a $250 million add-on to its 6¾% senior notes due Nov. 15, 2020 (B3/CCC+/) on Nov. 25 at par to yield 6 ¾%.

The weakest full high-yield bond package in November came from airline company United Continental Holdings, Inc., which scored 4.73, Moody's said. The Chicago-based air carrier sold $300 million of seven-year notes (B2/B) on Nov. 1 at par to yield 6%.

Bonds from Bullseye Merger Sub, Inc., with a score of 4.67, and Avis Budget Car Rental, LLC/Avis Budget Finance, Inc., with a score of 4.50, also were among the month's weakest, according to Moody's.

Brand Energy & Infrastructure Services, Inc., a Kennesaw, Ga.-based successor to Bullseye Merger Sub, sold a $500 million offering of 8½% senior notes due 2021 (Caa1/CCC+/) at par on Nov. 22.

Avis Budget, based in Parsippany, N.J., sold $250 million of senior floating-rate notes due 2017 (B2/B) on Nov. 20 at Libor plus 275 bps.

The 2014 outlook for junk bond covenant quality likely will not see substantial improvement, according to Moody's.

"This year has been characterized by a steady decline in bond covenant quality, to record lows," Alexander Dill, head of covenant research at Moody's, said in the release.

"This decline was interrupted only briefly by upticks in March and June, caused by temporary factors."

The percentage of bonds rated B1 and below with poor covenant protection did not decline appreciably in the first three quarters of 2013 and increased abruptly in October to a historical high of 50% from 35% in August, Moody's said.

"Further improvement beyond the still-weak 3.70 level will likely not occur without a significant market or macroeconomic crisis that severely impacts credit fundamentals or otherwise effects a long-lasting change in investors' risk appetite," Dill said.

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